Hurricanes And Flood Insurance

Palo Pinto residents may not think they will ever need flood insurance but those living around the Brazos River may think otherwise.  In any event, knowing what is going on in the hurricane and flood insurance industry is helpful for insurance law attorneys.  The Insurance Journal published an article in November 2016 dealing with this topic.  The article is titled, Q&A:  Deloitte Insurance Expert Discusses Hurricane Season And Flood Insurance.

Although Atlantic hurricane season ends in November, cleanup from any damage seen on the East Coast could last beyond the end of the season.  Some coastal areas, such as Virginia Beach, were impacted this season, particularly by flooding.

Flooding is the nation’s number one natural disaster, with roughly 25 percent of all flood insurance claims filed in low to moderate risk areas, according to data from the Insurance Information Institute.  Many standard homeowners’ policies don’t cover flood damage, making it an important consideration for insurers and their clients as Atlantic hurricane season comes to an end and the cleanup continues.

Howard Mills, the global insurance regulatory leader at Deloitte, discussed with Insurance Journal his thoughts on the areas of insurance most impacted by hurricanes, including claims and flood insurance regulation:

Insurance Journal:  This hurricane season storms like Tropical Storm Hermine and Hurricane Matthew weakened as they move up the East Coast, although some impact was still seen especially in coastal areas of Virginia.  When a hurricane or tropical storm like this hits, what areas of the insurance industry are typically most impacted?

Howard Mills:  The insurance industry is always closely monitoring hurricane season and the potential impacts.  Obviously, the number one way in which insurers are impacted is in their capitalization.  These can be very expensive storms.  The insurance industry, due to the very strict oversight and regulation that it is subject to, is very well capitalized.  Insurers focus on being well capitalized.  They also increasingly focus on risk concentration – they don’t want to have too much underwritten in one specific geographic region.  If they were to do so, they would obviously be subject to very severe and heavy losses if a storm path actually went through and hit that concentrated area.  Property casualty insurers are increasingly diversified in their risk concentration today.

IJ: Is there anything else that’s important for insurers to be aware of during hurricane season?

Mills:  One area where we’ve seen insurers making great progress in recent years is how quickly they can get into the field and pay and settle claims.  They’ve really embraced new technology, such as the use of drones.  If there’s such a severe storm that underwriters cannot get into the area immediately, they can now dispatch drones and other technological devices to begin to do their storm assessments and focus on paying claims and getting out there quickly, which is the number one thing to help consumers.  The quicker that a claim is paid, the sooner they have the resources to begin the rebuilding process.  Insurers have made great strides in that area.

IJ:  Looking at past incidents of hurricanes and tropical storms, what has the insurance industry learned and in what ways has it improved its coverage in this area?

Mills:  One of the things that the insurance industry has learned is diversifying its concentration of risk.  Historically, as the insurance industry has done everything from fire prevention to auto safety, it has also been on the cutting edge of mitigating the impacts of storms.  Some things the industry has been doing recently are developing new building techniques, developing new techniques to help mitigate the damage and getting the word out to consumers about small investments like hurricane‑proof shutters and roof clips that will keep the roof on a building in the event of a severe storm.  All of these things will really do so much to reduce the losses.

IJ: With that in mind, is there anything that the industry is still working to improve going forward?

Mills:  It is always improving. Going back to the use of drones, for example, the industry is now working on robotic devices that can actually get into structures.  It is working on its IT platforms so that field agents can communicate with each other to get claims processed and paid through mobile devices.  The industry is also working at the consumer education level in terms of things that consumers can do to help themselves in the event of a tragic storm.

IJ: From an insurer’s perspective, what types of claims are seen most frequently in the event of a hurricane?

Mills:  Obviously, the damage from the wind.  One of the things that historically has been a problem is that flooding is not covered in a typical homeowner’s insurance policy without purchasing flood insurance.  One of the debates that we’ve seen in many of these storms is wind versus water.  In other words, there’s often water damage associated with a hurricane in the coastal area.  Was that water damage caused by flooding, which would indicate a flood insurance triggering event, or was it caused by wind – the actual hurricane moving the water into the structure and thus causing the water damage?  This has been the cause of some protracted legal battles in the past.  It’s one of the reasons why the insurance industry, public officials and state insurance regulators are always beating the drum and trying to get the word out to folks that they need to understand their contract.  They need to understand their coverage ‑ what the policy covers and what it does not.  They need to understand that flood insurance is actually very affordable and readily available through the National Flood Insurance Program.  It’s a great investment.  It’s something that every homeowner, especially those in any type of a coastal area, should always have.

IJ:  Now shifting to the perspective of the insured, what’s the best strategy for homeowners and businesses to avoid these insurance claims during hurricane season?

Mills: There are some minor investments a homeowner can make or a small business owner can make in the actual physical structure of their building that can do a great deal to mitigate the impacts of a storm.  Hurricane‑proof shutters and roof clips can really prevent a lot of damage.  In the event that they do have damage, the most important thing that homeowners particularly need to know is that they have to have a very good knowledge of what their insurance policy covers.  They have to keep that insurance policy somewhere other than their home – in a safety deposit box, for example.  Most importantly, they need to keep a detailed inventory of all of the possessions that are in their home.  Consumers can go to the Insurance Information Institute’s website.  There, they will find a checklist of how to prepare a home inventory list.  It’s not just writing it down.  They recommend that you go around with your phone and record a video of every room in the house, because what we have found consistently is that once an event has happened where you have a total loss, no one can possibly remember all the items in their home.  It really is critically important.

IJ:  What is recommended for homeowners and businesses when they’re seeking the right insurance policy for covering flood damage?

Mills:  They should keep in mind these are real risks, and they should understand that in the event of a hurricane in a coastal area, many people mistakenly think, “If I’m not two or three blocks away from the shore, I’m safe.”  When in fact, we know that the storm surge in a major storm can extend in for miles.  They really need to have their property covered.

IJ: You focus a lot on the regulatory side, so could give me an overview of what the regulatory landscape is like for flood insurance today?

Mills:  It’s a very interesting area of public policy, and it’s one that the Congress is routinely debating and discussing.  The fact is that the federal flood insurance program is very affordable.  One of the reasons is that it has been artificially subsidized.  In other words, Congress has been putting a lot of money into the National Flood Insurance Program.  It loses money because the rates are so low.  There are those in Congress who are calling for actuarially justified rates for flood, which means that the rate will go up.  So go out and buy it while you can, because if Congress does do this, there is an actuarial justification for it.  With the new Congress coming in and a new administration, we’re likely to see some pretty interesting debate around the future of the National Flood Insurance Program.

IJ:  You mentioned those low‑ to moderate‑risk areas, some of them in the Midwest, where having flood insurance isn’t federally required.  With this in mind, what factors should companies take into consideration when deciding whether to purchase flood insurance in those areas?

Mills:  They should just do a really good, honest assessment of the risk and recognize that floods can occur in other ways as well.  There can be water main breaks.  There are all different types of ways in which flood damage can occur even if you’re not in a coastal area or not in a federally‑designated floodplain.

IJ:  As this Atlantic hurricane season wraps up, what can the insurance industry, as well as its clients, begin doing in preparation for next year?

Mills:  Although the U.S. did have some pretty significant storms, we did not have a major hurricane this year.  Nothing anywhere near the storms of 2005, for example, such as Katrina and Wilma.  What worries me and what worries a lot of people is that people will start to forget that these terrible storms can happen.  Actually, I shouldn’t say can happen.  They will happen.  It’s inevitable.  We don’t know when, but there will be severe storms to come in the future.  People can’t let their guard down.  They need to know the risk.  They need to make sure that their insurance is up‑to‑date and that they understand the policies.  As far as insurers, I have no worries about them.  The insurance industry is very focused on new technology and on being responsive.  They have a very robust and strict regulatory environment that does the most important thing, which is to make sure that they have enough capital on hand to pay all claims.

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